Imperial Brands Maximising Category Opportunities CAGNY 2019 21 February 2019
Disclaimer Certain statements in this announcement constitute or may constitute forward-looking statements. Any statement in this announcement that is not a statement of historical fact including, without limitation, those regarding the Company s future expectations, operations, financial performance, financial condition and business is or may be a forward-looking statement. Such forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected or implied in any forward-looking statement. These risks and uncertainties include, among other factors, changing economic, financial, business or other market conditions. These and other factors could adversely affect the outcome and financial effects of the plans and events described in this announcement. As a result, you are cautioned not to place any reliance on such forward-looking statements. The forwardlooking statements reflect knowledge and information available at the date of this announcement and the Company undertakes no obligation to update its view of such risks and uncertainties or to update the forwardlooking statements contained herein. Nothing in this announcement should be construed as a profit forecast or profit estimate and no statement in this announcement should be interpreted to mean that the future earnings per share of the Company for current or future financial years will necessarily match or exceed the historical or published earnings per share of the Company. This announcement has been prepared for, and only for the members of the Company, as a body, and no other persons. The Company, its directors, employees, agents or advisers do not accept or assume responsibility to any other person to whom this announcement is shown or into whose hands it may come and any such responsibility or liability is expressly disclaimed. 2 CAGNY 21 February 2019
Our Investment Case Sustainable Shareholder Returns Guidance Corridor (cc): Net Revenue Growth 1-4% and EPS Growth 4-8% Quality Growth From Tobacco Significant Additive Growth from NGP Simplification & Cost Efficiencies Capital Discipline and Cash Generation Strong Governance and Sustainability Agenda 3 CAGNY 21 February 2019
Introducing Imperial Brands Net revenue 7.7bn Op. margin 46% 36,400 employees 160 markets Top 5 markets US Germany UK Australia Spain Cash conversion 95% Debt reduction 0.8bn pa Ten years +10%pa dividend growth 4 CAGNY 21 February 2019
Imperial Brands introductory video 5 CAGNY 21 February 2019
Consumer & Regulatory Context 6 CAGNY 21 February 2019
Changing Landscape Shaping Category Developments Consumption evolving Globalisation & demographics Consumers Lifestyle Innovation Technology & connectivity Industry Government Regulation Category Development 7 CAGNY 21 February 2019
Nicotine Consumption Evolving to Reduced Risk Products Growing consumer repertoire 10% 23% 11% 56% 1 category 2 categories 3 categories 4+ categories Multi category usage increasing 20% of smokers also vape 8 CAGNY 21 February 2019 Source: 2018: Global Cross Category Survey (USA, UK, Germany, France, Italy, Japan, Russia), used in last week.
Clear Drivers for Vaping Increasing smoker choice Harm reduction 76% Better value than cigarettes Social acceptability 67% 71% c.36m vapers in 2018 30% CAGR since 2011 Relaxation 67% Source: Millward Brown Global Tracker, UK and US blended Source: Euromonitor October 2018 9 CAGNY 21 February 2019
Total tobacco revenues bn Tobacco Market Overview Profit pool in IMB footprint relatively resilient Tobacco Market Revenue: IMB Footprint Low single digit growth Tobacco remains relatively affordable Industry Tobacco Volume CAGR -3% Pricing supports resilient revenue development Additive vapour opportunity 2010 2012 2014 2016 2018 2020 2022 2024 2026 10 CAGNY 21 February 2019 Source: Internal Data & Canback study
Resilient Earnings Growth in Regulated Industry History of managing regulatory & excise changes P/E 25.0x +450% EPS index 6.0 20.0x Average sector P/E (LHS) 5.0 15.0x 10.0x 5.0x Average EPS indexed to 100 (RHS) 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 4.0 3.0 2.0 1.0 EUTPD I 11 CAGNY 21 February 2019 WHO FCTC EU Advertising Directive Australia PHW UK PHW US Federal excise Brazil public places & advertising Australia Plain Packs & Excise UK ban POS Canada Menthol ban EUTPD II France Plain Packs UK Plain Packs
Broad Regulatory Approach in Priority Markets Managing Regulation in all environments Less Restricted Advertising restrictions Public smoking restrictions Display bans Standardised packaging Most Restricted 12 CAGNY 21 February 2019
US Regulation Evidence-Based Regulatory change supported by science & data Well established rulemaking process Structured approach evidence & science-led Considers risks & benefits to whole population Requires input from all stakeholders Takes time to enact changes 13 CAGNY 21 February 2019
US Regulation Update Engaged & supportive of evidence based regulation Tobacco Regulation Lengthy regulatory process for both menthol & low nicotine Multiple stakeholder input; scientific, legal, law enforcement, public health, industry and budgetary stakeholders Risk of unintended consequences Track record of managing regulatory change NGP Regulation Aligned on strict youth access prevention measures Aligned on role of NGP to support harm reduction Positive recent meetings with FDA Supporting tighter regulation 14 CAGNY 21 February 2019
Consumer & Regulatory Context Key takeaways Consumer habits are changing Smokers enjoy a wider repertoire of nicotine categories Vaping growing as a smoker preference Tobacco market remains resilient Experienced at managing regulatory change 15 CAGNY 21 February 2019
Imperial Brands: Strategy & Choices 16 CAGNY 21 February 2019
Our Strategy Creating Something Better for the World s Smokers Next Generation Products blu Adoption Model BELIEVE BELONG BUY BUY AGAIN Strong Cash Flow Right Markets Right Brands Quality Growth High Margins Reinvest Tobacco Maximisation Shareholder Returns Market Repeatable Model 17 CAGNY 21 February 2019 Creating value for shareholders
TobMax Strategic Focus: Informed Choices Assets and capabilities aligned to growth opportunities Focus on fewer brands Invest in priority markets Consistent market execution Market Repeatable Model Lean & agile organisation Simple Operating Model Clear investment choices for growth Prioritised strongest brands & invested in main demand shifts Focused on key tobacco profit pools where we can win MRM; our codified RTM model Lean operating model supports growth agenda 18 CAGNY 21 February 2019
Right Markets: Prioritisation Focusing resources behind market potential 10 Priority Markets 23 Key Markets 100+ Partner Markets Objective Profitably growing share Driving to full potential Lean portfolio Cost focus Minimise complexity Maintain profit Execution & Support Market-led/tailored initiatives Group & divisional support Standard business tools & initiatives Divisional support Divisional oversight Investment Majority of investment Some new investment Limited investment % of Profits 70% 20% 10% 19 CAGNY 21 February 2019
Consistent Market Execution Codified go-to-market model Analyse data, learn, improve and share Portfolio matched to market trends and consumer demand shifts Customer collaboration and strong commercial partnerships Invest consistently in equity of brands that matter Optimal portfolio available in right stores, supported by right activities Clear pricing strategy consistently applied 20 CAGNY 21 February 2019
Focused Portfolio Across the Risk Continuum Resources allocated behind product potential Combustible Tobacco Non-Combustible Tobacco Tobacco Free Cigarettes Heated Tobacco Products Snus Vapour Products Oral Nicotine Delivery Nicotine Replacement Therapies Level of Toxicants Acquired: Acquired Dragonite Acquired: 2005 2012 2013 2015 2017 2018 2019 Set up: Acquired: Roll-out of myblu Launched: Tobacco Free Snus 21 CAGNY 21 February 2019
Vapour: Additive Growth Opportunity for Imperial Growing category Global vaping market RSP ( bn) 8 30 50 2018 2025 2025 Low High Retail value of vaping market growing between 300% and 500% Imperial 14% tobacco footprint share with limited impact on our combustible revenue USA 36m smokers 10m vapers Europe 145m smokers 16m vapers IMB tobacco share IMB 9% tobacco 16% share 22 CAGNY 21 February 2019
Positive Economics for Smokers and Imperial Retail Selling Price IMB Net Revenue 2 3.87 5.28 3.00 9.17 1 Economic incentive for smokers myblu pod Additive net revenue for Imperial 20 cigarettes Based on RSP per pod (1.5ml) versus pack of 20 FMC Based on net revenue per pod (1.5ml) versus pack of 20 FMC 23 CAGNY 21 February 2019
Driving Profitability in Vapour Clear levers being addressed Higher Net Revenue per Pod Lower COGS Route to Market Development Operating Leverage Normalisation of Overheads/A&P Supports higher absolute gross margin Pod innovation Simpler design/ automation E-commerce Normalised retailer margins Driving greater adoption Market expansion Scale benefits Steady state P&L Driving Gross Margin Contribution Driving Operating Margins 24 CAGNY 21 February 2019 Expect to exit FY19 with positive monthly operating profit contribution
V Clear Proposition for Smokers & Shareholders Unique set of assets & competencies to deliver growth Delivering to Smokers Delivering to Shareholders Compelling proposition for smokers Increasing Profitability & Returns Compliance & Regulation 25 CAGNY 21 February 2019
Delivering Against Our Strategy 26 CAGNY 21 February 2019
Delivering Against Our Strategy Building growth momentum in FY18 Growth Brand share Net Revenue EPS Cash conversion Dividend +70bps +2% +5% 97% +10% Tobacco Maximsation Next Gen Products Capital Discipline $ Volumes outperforming market +10 bps 67% +50 bps share FY18 Revenue % from Asset Brands Priority mkt share since FY17 investment Step-up in FY18 FY18: 200m net revenue Additive revenue opportunity Innovative R&D pipeline Investment driving consumer offtake 110m 0.8bn 15.5% cost savings in FY18 further net debt reduction post-tax returns on US acquisition Active capital management through divestments 27 CAGNY 21 February 2019
Tobacco Max: Growth Brand Focus Investment delivering share gains Driving sustained share gains in Growth Brands Growing revenue from our strongest equities 5.4% 7.2% 9.2% Asset Brands Portfolio Brands 33% 49% 43% Driving quality revenue Share gains in priority markets 51% 57% 67% Improved tobacco revenue delivery 2013 2015 2018 Growth Brand Share 2013 2015 2018 Asset Brands % of Revenue 28 CAGNY 21 February 2019
USA: Resilient Tobacco Market Acquisition strengthened our market position Industry volume Imperial price/mix -2.5% -2.6% -2.0% -0.8% -1.6% 8.0% 9.7% 6.9% 11.7% -4.0% -4.1% -3.3% Volumes average c. 3% declines -4.8% FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 2015 2016 2017 2018 Medium term outlook: industry volume declines more than offset by price/mix 29 CAGNY 21 February 2019
USA: Portfolio Strategy Driving Share Improvements Investment in focus brands and segments Market Share Progression +5bps Cigarette Price Segment Development* 2018 v 2015 FY16 FY17 H118 FY18 Q119-10bps 8.7% 0.2% 0.5% 1.1% -20bps Traditional Premium Premium Value Traditional Discount Deep Discount -30bps -30bps -1.8% 30 CAGNY 21 February 2019 * Segment volume % of total 2018 versus 2015
USA: Mass Market Cigars Success Strong portfolio growing faster than market Market Mix Market Growth 2016-18 Market Share 13.5% 12.6% 10.6% 10.9% ITGB Mix 11% 7% 25% 3.5% 4.0% 5.1% 6.8% Homogenised Cigars Natural Leaf Cigars 2015Backwoods 2016 2017 2018 2015 2016 ITG Natural 2017 2018 ITGB Natural Mass Market Cigar revenue +38% since 2016 31 CAGNY 21 February 2019
Focus on Priority Markets Increased investment strengthens share position +90bps Flat -130bps* -80bps* +100bps Investment supporting share gains Consistent financial delivery; managing share Value share growth; excise & pricing affect volume Focus on blonde share; trajectory improving Building market presence and share gains -110bps +310bps +100bps +40bps Strong share position balanced with returns focus Share gains in a difficult excise environment Simplified portfolio drives profitable share growth Strong share gains with West in value segment 32 CAGNY 21 February 2019 * Blonde tobacco share Two year share movement 2016-2018
Our blu Adoption Model Omnichannel market execution BELIEVE Building awareness, consideration and trust BUY Stimulating trial and purchase BUY AGAIN Creating repeat purchase BELONG Fostering loyalty through community and belonging 33 CAGNY 21 February 2019
Strong Consumer Awareness for blu blu resonating strongly with smokers & vapers Unaided awareness: Smokers Unaided awareness: Vapers 34 CAGNY 21 February 2019 Source: Feb 2019 survey conducted by Engine among a sample of 2,000 18+ US adults; % of respondents
The Pledge by blu Inspiring adult smokers to make a change Engaging Adult Smokers & Vapers Video Views 8,597,649 Results after 7 weeks Conversation +2,100% Positive Sentiment +54% 35 CAGNY 21 February 2019
Imperial Brands: blu Pledge video 36 CAGNY 21 February 2019
USA: myblu building presence in retail Consumer off-take growing Pods: Consumer off-take Retail presence building Growing consumer off-take Category has slowed in recent months Increasing blu adoption Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec Jan 2018 2019 37 CAGNY 21 February 2019 Source: Aggregated IRI data
UK: myblu building presence in retail Consumer offtake growing Pods: Consumer offtake Creating the pod category in the UK Distribution building Leading unaided awareness Consumer off-take growing Apr May June July Aug Sep Oct Nov Dec Jan 2018 2019 #2 market share 38 CAGNY 21 February 2019 Source: Aggregated EPOS data for traditional retail
myblu building retail presence in priority markets Leading retail share and driving category growth Germany #1 in retail 3 months post national launch Successful market roll-outs Italy #1 in retail Category doubled Japan #1 in retail Leading in distribution Russia #2 in retail Following recent launch France #1 in retail Leading device sales Also launched in.. Spain Austria Canada 39 CAGNY 21 February 2019 Source: Nielsen data
Clear Innovation Thinking Driving portfolio evolution Consumer focus Flavour Design Satisfaction Convenience Other focus Safety Cost IP 40 CAGNY 21 February 2019
Dynamic Innovation Supports Smoker Conversion Further rollouts in FY19 Vapour Nicotine salts Connectivity 3D Flavour Next gen pod Other NGP Tobacco Free Snus Heated Tobacco 41 CAGNY 21 February 2019
Imperial Brands: Video on 3D Flavour and Connected Device 42 CAGNY 21 February 2019
PULZE Heated Tobacco Launch Better tobacco taste Consecutive smokes Easy to use & clean Options to personalise the experience Tested well with consumers 43 CAGNY 21 February 2019
Imperial Brands: Video on Pulze 44 CAGNY 21 February 2019
$ Strong Cash Delivery Debt repayment of c 0.8bn pa over 5 years Free Cashflow m Dividend m 2,121 2,421 2,344 2,551 1,165 1,301 1,428 1,577 1,747 1,796 FY14 FY15 FY16 FY17 FY18 Dividend pay-out ratio of FCF (%) FY14 FY15 FY16 FY17 FY18 65 61 59 67 68 45 CAGNY 21 February 2019 Free cashflow = Change in net debt before FX, dividend & US acquisition
$ Strong Capital Discipline Drives returns on assets and deleverage Net Debt/EBITDA Return on Invested Capital 3.4x 3.3x 3.0x 2.9x >14% post tax ROIC Growing despite M&A & investments 2.6x Rigorous returns criteria for M&A Capital light NGP model Active management of capital 2014 2015 2016 2017 2018 4bn of debt repaid over 5 years 46 CAGNY 21 February 2019 ROIC = Adjusted net operating profit after tax divided by adjusted total equity and reported net debt
$ Strategic Focus: Right Markets, Brands & Products More active capital allocation Strategic Focus Cost & Capital Discipline Capital Priorities $ Fewer brands, SKUs Market prioritisation NGP growth opportunity Lean operating model/ footprint optimisation More active portfolio management Divestments and exits Proceeds of up to 2bn over next c. 12 months Ongoing debt reduction Investment in growth opportunities Shareholder returns 47 CAGNY 21 February 2019
Our Investment Case Sustainable Shareholder Returns Guidance Corridor (cc): Net Revenue Growth 1-4% and EPS Growth 4-8% Quality Growth From Tobacco Significant Additive Growth from NGP Simplification & Cost Efficiencies Capital Discipline and Cash Generation Strong Governance and Sustainability Agenda 48 CAGNY 21 February 2019